Another Surprising Conversation With "Athens"

I wrote about a conversation I had with a Greeks shipper living in Athens on May 15. In that article I conveyed the thoughts of my friend who was convinced that the June 17 Greek elections would produce a different result than the May 26 effort to form a government. At the time he said:

When the next election comes, Greeks will not vote in anger and they will not vote for the idiots on the fringes. The centrist parties will rebound. A National Salvation Government will be formed.

He was proven correct and I called him this morning to get his thoughts. It went like this:

BK:

Good call on the election. What happens next?

Athens:

New Democracy (ND) and PASOK (P) will form a new government. Of significance is that another socialist party, The Democratic Left (DL), will join in with ND & P. This makes the coalition more credible as Fotis Kourelis runs DL. Fotis is well liked and respected in Greece. Syriza and the Communist parties will form the opposition. I have no idea what the far right parties will do.

BK:

Can this work?

Athens:

For a time, maybe. The DL party is in favor of rewriting the deal reached with Germany. I think that talk of this will happen in the coming days.

BK:

Are you pleased with the voting results?

Athens:

It's not possible to be pleased with anything that happens in Greece these days. I have taken my family to London for a few months. We will go the Olympics and try not to think about life in Athens. I fear that social unrest is going to spring up again. This is the real reason I took my family out of the country.

BK:

That is a shocking statement. What will bring back the demonstrations?

Athens:

The country is flat broke. In a few weeks the government will not be able to pay workers. When this happens, the strikes will resume.

BK:

What are the chances of another bailout package from Brussels?

Athens:

Screw Brussels. The decision on more aid for Greece comes from Berlin. I think the Germans will say, “No.”

BK:

So you think that Greece will be forced out of the Euro?

Athens: Yes, this is a possibility. Greece is not competitive at all. It is 40% less competitive than even Spain. So ultimately some form of devaluation must happen.

BK:

What’s your sense of timing for Grexit?

Athens:

Where will the money come from that Greece needs to stay alive? I tell you again that it must come from Germany. We may hear that Germany is willing to renegotiate parts of the bailout, but significant new money from Germany is not in the cards. There will be another crisis in less than three-months.

BK:

If Greece goes, does Spain follow? What about Italy?

Athens:

If Greece leaves the Euro there will be tremendous hardships for all of the countries involved. Spain would be very hard hit, Italy as well. The economies and commercial banks of the southern European countries would implode. The costs would be staggering. These facts are understood, so I think they will not let the Euro collapse.

BK:

But what is Plan B?

Athens:

Simple. Germany will leave the Euro. It will reestablish the old Deutche Mark (DM). The Euro, without Germany in it, would fall against all currencies. The necessary adjustments to restore competitiveness will have been achieved. The DM will be very strong against the Euro. This will hurt Germany, but not for long. In the end this is the only solution that I can see.

BK:

What about France?

Athens:

The most important election this weekend for Europe was not in Greece. It was in France. The election results were very clear. France is going in a very different direction than Germany. The cooperation between France and Germany over the past few years is finished.

BK: Wow! So what do you do? Do you sell the Euro and buy dollars?

Athens:

I already own dollars. I don’t like them either. Recently I have been converting Euro holdings into German corporate paper that pays in DM if the Euro is no longer the official currency of Germany.

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Notes:

The idea that it is Germany that leaves the Euro is not new, but I have always considered it to be far fetched. Not any longer. This fellow has been spot on regarding developments in Greece. He is well connected in Germany. That he is putting money on the table to back up his views is important to me.

The EUR rate against the major crosses this morning does not reflect the views of my friend. The current EURUSD 1.2570 rate reflects the market thinking that there is no immediate crisis. It certainly is not a price that contemplates a Euro without Germany. Should “Athens” thinking on the outcome gain some traction, then the Euro is headed much lower.

The Bonds that have DM protection clauses are new to me. The following link is to a prospective of the securities issued by VW on June 12, 2012. (Link - PDF) The language regarding “Successor Currency” is here:

References herein to a "Specified Currency" shall include any successor currency provided for by the laws in force in the jurisdiction where the Specified Currency is issued or pursuant to intergovernmental agreement or treaty (a "Successor Currency") to the extent that payment in the predecessor currency is no longer a legal means of payment by the Issuer on the Notes.

A number of “DM protected” bonds have been issued in the last month. If someone has a full list, I would appreciate it. The timing of this issuance is interesting. I understand the bonds were lapped up by the market.

I’m tempted to short the EURUSD on this information. But FX markets are not at all predictable, and there is no assurance that things go in the way this article suggests. One thing that I am pretty sure of is that volatility in FX markets is going to take a very big leap.